Letter to ACC: Change Regulation of Water Companies

For years, investor-owned water utilities in Arizona have been pressing the Arizona Corporation Commission for changes in regulation. During the 1980s and 1990s, the push for change was focused on corralling the myriad small, "mom-and-pop" water companies that sprang forth to serve residential developments in areas outside municipal water systems. More recently, larger water companies have been fighting for regulatory changes to lessen chronic under-earnings resulting from regulatory lag and the reluctance of the ACC to modernize its ratemaking treatment for water companies.

AIC's White Paper on regulatory reform, issued in 2008, also emphasized the need for streamlining and modernizing regulation of water companies to lessen the public and private costs of regulation and to improve the financial health of struggling utilities. Our report cited many of the ideas thoroughly discussed over the years by companies, stakeholders, ACC staff and Commissioners.

The argument for regulatory change is compelling. How can companies attract necessary capital at lowest rates on best terms to repair aging water systems, add new plant to meet growth, comply with water safety standards and implement water conservation in the desert when actual returns on these investments is less than two percent? They can't. And, that's problematic for all customers today and in the future.

Having witnessed recent, well-conceived and executed regulatory progress at the ACC in rate modernization for energy companies, the water companies are rightfully becoming increasingly impatient for action on their issues. And, as I mentioned previously, their plight is not a new one. Nevertheless, despite over three decades of meetings, workshops and reports-some from the Commission's staff-on reducing regulatory burdens for water companies, very few improvements have been made and virtually no progress has occurred on the big issues of company consolidation, financial health and capital attraction.

So, a new organization called "Arizonans for Responsible Water Policy" sent a letter this past July to the Commissioners outlining proposals and goals aimed at "creat[ing] an economic culture that encourages investment in water solutions that are economically and environmentally sound over the long term." ARWP's ideas in this regard are centered on mitigating earnings attrition that results from regulatory lag, minimizing rate shock to customers and removing barriers to consolidation.

ARWP's letter was soon followed by its report encouraging implementation of Distribution and Collection System Improvement Charges (DISCs) for water and wastewater companies. A DISC is a surcharge on customer bills for capital improvements made to water and wastewater systems. The mechanism allows more timely return on these investments in between major rate case adjustments, not only reducing the detrimental effects to earnings caused by regulatory lag, but also fostering rate gradualism for customers. It reduces the large and lumpy jumps in rates caused by the current rate case process at the ACC.

I've previously written (you can read it here) about how some financial analysts rank Arizona's regulatory climate at the low end of states' regulation of investor-owned water companies. The primary reason for the low rating is poor earnings due to inaction on reforms to reduce regulatory lag.

Given how important delivery of safe and adequate water is to Arizona's future, it's time for the ACC to step up to ensure necessary investment in Arizona's water infrastructure. Arizona customers deserve nothing less.